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Emerging Market ETFs in Focus on MSCI Index Review

Zacks Equity Research

MSCI (MSCI) has recently shook the market by announcing a 2014 Annual classification review which denies entry of China A-shares to its emerging market index. Several checks in investing in China A‐shares compelled MSCI to issue this decision. Per MSCI, the present quota is too limited to deserve an insertion into the conventional index at this moment (read: China A-Shares ETFs Explained).

Investors should note that A Shares are defined as the common stocks issued by companies based in mainland China and are traded in renminbi (‘‘RMB’’) on the Shenzhen or Shanghai Stock Exchanges. These are currently closed off to many Western investors. Only Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors have access to these shares.

However, MSCI also noted that it will continue monitoring China A-shares market and keep them on hold for consideration in the 2015 Annual Market Classification Review. Initially, China A-Shares market was blocked to many foreign investors, but it is slowly beginning to open up. Foreign investors can access this market through ETF form.

The growing share of the China A‐shares market, the option of additional regulatory reforms leading to grater tradability and some changes expected in the near term including the execution of the Shanghai/Hong Kong Stock Connect program made MSCI open to A-shares. MSCI will launch a China A International Index as a separate standard by June 27 (read: China A-Shares ETF from KraneShares Hits the Market).
No Development in Developed Index
Apart from A-Shares issues, MSCI also ruled out the possibility of South Korea and Taiwan’s upgrade to a developed index.  Dearth of remarkable development in those regions resulting in non-‘accessibility’ in the respective equity markets was behind this decision.

These two markets have long been under debate on whether they should receive a developed status. Notably, MSCI’s peers – FTSE and S&P Dow Jones Indices – already accredited South Korea as a developed nation.
On a separate note, MSCI reiterated Egypt’s status as an emerging market, escaping a relegation to frontier markets grade given the huge foreign currency pile-up in the concerned nation.
To Sum Up
As per Bloomberg, about $2.3 trillion is linked to the MSCI World Index of developed markets while $1.3 trillion of investment revolves around the emerging-market indicator. The MSCI emerging market index allocates highest share in China (about 18.6%) followed by South Korea (16.1%) and Taiwan (12.1%).
Three top holdings go to Samsung Electronics which is a South Korean company, Taiwan Semiconductor and Chinese Tencent Holdings. So, it was less likely that MSCI would mess with its indexing. An upgrade might compel passive funds to sell their stakes in Korean or Taiwanese shares.
ETF Impact
The ETF market seems okay with this decision. iShares MSCI Emerging Markets (EEM) – the second largest emerging markets equities ETF – fell 0.34% in the key trading session on June 11. iShares MSCI South Korea Capped (EWY) was down 0.38% on June 11 while iShares MSCI Taiwan (EWT) closed June 11 with 0.52% loss but gained 0.18% in after hours.
China A-Share ETFs also shed some gains with Market Vectors ChinaAMC A-Share ETF (PEK) being down 0.67% on June 11 and db X-trackers Harvest China ETF (ASHR) retreating 0.49% on the same day.  Among the discussed investing avenues, only Egypt was the true gainer from this classification and generated 1.46% return at the close on June 11.
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